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Suppose you are required to fund a portfolio of homogeneous $330 million fixed-rate loans with 3-year maturities and 8 percent interest per annum with repayments
Suppose you are required to fund a portfolio of homogeneous $330 million fixed-rate loans with 3-year maturities and 8 percent interest per annum with repayments in equal yearly instalments using two types of bonds. One bond is an 8%,$1,000 bond maturing in 3 years, and the other is an 8%,$1,000 bond maturing in 1 year. Assume annual coupon payments for both bonds. If the treasury management section of the bank is attempting to minimise interest rate risk, how many bonds should be issued? Your manager has suggested that both bonds should be used. Explain the rationale for your manager's suggestion. The other alternative that the manager has suggested is to use a 2-year swap. The swap comprises a two -year bond with a fixed coupon rate of 8.0 percent paid annually and a floatingrate bond with a duration of approximately zero. Assume the yield curve that can be applied for these instruments is flat at 8%. Examine both alternatives and advise the treasury management
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